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What is private residence relief?

PUBLISHED: 15:52 05 April 2019 | UPDATED: 16:05 05 April 2019

Private residence relief applies to both the dwelling house itself and the land used by the taxpayer for his or her own enjoyment, explains Jon Hook. Picture: Getty Images

Private residence relief applies to both the dwelling house itself and the land used by the taxpayer for his or her own enjoyment, explains Jon Hook. Picture: Getty Images

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Jon Hook from Norwich Accountancy Services explains all you need to know about PRR.

Jon Hook of Norwich Accountancy Services. Picture: ArchantJon Hook of Norwich Accountancy Services. Picture: Archant

Private residence relief (PRR) acts to exempt any gain arising on the sale of a ‘dwelling house’ from capital gains tax (CGT), where the dwelling house has been the taxpayer’s only or main residence.

The relief applies to both the dwelling house itself and the land used by the taxpayer for his or her own enjoyment, up to a permitted area. Although the tax legislation provides for private residence relief to extend to garden or grounds enjoyed with the residence, there is no statutory definition of the phrase.

HMRC, in their CGT manual describe ‘garden’ as ‘a piece of land, usually partly grassed and adjoining a private house, used for growing flowers, fruit or vegetables or a place of recreation’. The word ‘grounds’ however seems to imply a larger area than a garden, with HMRC’s definition being: ‘enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation.’

HMRC staff are instructed to accept that land surrounding a residence and in the same ownership are the ‘grounds’ of the residence, unless it is used for some other purpose. Land should not be excluded from garden and grounds where it had traditionally been the garden or grounds, but at the date of sale is unused or overgrown, provided that there is no significant business use.

The ‘permitted area’ that HMRC will consider for PRR is 0.5 hectares, and includes the land on which the residence stands. In certain cases more than 0.5 hectares is accepted, but in these cases the Tax Office will consider the size of the grounds needed for ‘reasonable enjoyment’ – and this is not always clear cut.

It is not necessarily what the owner requires in terms of land for ‘reasonable enjoyment’ but what is deemed to be needed in regards to the size and character of the dwelling house.

When the grounds exceed the ‘permitted area’, it is important to establish what land falls within this area and what falls outside, as the value of the land may vary. Where the land does exceed the ‘permitted area’, the part that is treated as such is the part deemed most suitable for the occupation and enjoyment of the residence.

In the most straightforward CGT cases where PRR is claimed, the house and garden will be sold at the same time and the total garden or grounds of the house will be within the permitted area. But in some cases it may be beneficial to sell off some land.

The most important thing to remember when disposing of land attached to a dwelling is not to sell the land after selling the dwelling. If you do, the land subsequently sold will not qualify for PRR relief, even if for most of the period of ownership it was enjoyed with the house.

My tip is to always get some tax advice before selling any significant asset to ascertain if there are any exemptions available and/or any potential liability– if you don’t it may seriously affect your financial health!

This column is sponsored by Norwich Accountancy Services.

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